Malaysian inventory levels are now at 1.94m tonnes, translating to an annualised stock/usage ratio of 10.3%. This is above the historical average of 9.5%, signalling that stock levels are officially in a surplus. With demand continuing to disappoint, with most of the main markets in negative territory YTD, we do not expect the current strength in CPO prices to persist. This would coincide with an anticipated softening of soybean prices once the initial impact of hurricanes in the US wear off and weather normalises. No change to our UNDERWEIGHT stance on the sector.

Malaysia’s CPO production rose 13.6% YoY in YTD-Aug, although August’s output was down by a slight 0.9% MoM from July. We believe production would pick up in the next couple of months, as most planters are expecting peak output to be in September/October. For the whole of 2017, we expect Malaysia’s CPO output growth to moderate to 10-12% YoY.

Exports rose by 6.4% MoM in August, bringing YTD exports to a 2% increase YoY. In YTD-Aug, exports saw a rise to Pakistan (+14% YoY) and Philippines (+6%). This was offset by a decline in exports to China (-4% YoY) India (-29%) and the US (- 20.5%), while exports to the EU was flat YoY.

Inventory rose 8.8% MoM to 1.94m tonnes in August, despite a dip in output. Annualised stock/usage ratio for August is now at 10.3% (up from 9.5% in July), which is now above the 15-year historical average of 9.5%. This means that stock levels are now officially in a surplus situation. We expect to see a continuation of rising inventory levels, as production resumes its recovery during the peak seasonal period.

2Q17 results disappointed, as six companies (IOI Corp, Genting Plantations, TSH Resources, Kuala Lumpur Kepong, IJM Plantations and Felda Global Ventures) reported results that were below expectations. Two (Sime Darby and Sawarak Oil Palms) reported results above expectations, with only CB Industrial Product in line. We continue to see strong YoY FFB output growth in 2Q17, although most companies saw lower QoQ production growth. We observe Indonesia continuing to drive this growth, despite most companies guiding for growth to start moderating in 2H17. In Malaysia, while the growth recovery has not been consistent throughout the country, most companies are guiding for output to pick up more strongly in 2H17, with the peak output slated to be in September/October for Malaysia. Most companies continued to guide for strong double-digit FFB growth in 2017, coming from a low base in 2016. For those with downstream operations, we saw stronger QoQ margins, as feedstock prices fell. Most companies continue to guide for stronger margins at their downstream divisions, as selling prices have risen, while feedstock prices continue to weaken.

We maintain our UNDERWEIGHT rating on the sector, on the back of a strong output recovery and weak demand dynamics. Catalysts include a positive change to global demand and any extreme weather occurrences that would have an impact on global vegetable oil output. Our Top BUY is Sarawak Oil Palms while our Top SELL is London Sumatra. (Hoe Lee Leng)

We expect yet another volatile year for CPO prices – similar to last year – due to the recovery in CPO output which we anticipate to start coming through after 1Q17. This should result in a moderation of prices. Demand remains unexciting, given China’s predilection for soybean which remains in abundance, while India has yet to get over its currency issues. We maintain our NEUTRAL sector call. We favour selected big-cap counters like KLK, Sime Darby, Golden Agri and London Sumatra – being high-beta stocks which would fare well in a volatile environment.

We expect favorable CPO fundamental and better soybean prospect to outweigh the impact of weaker Indian palm oil import as a result of India’s demonetization policy. We believe Indian palm oil import should normalize by Jan-17 once the issues have been settled. Maintain overweight with LSIP as our top pick.

Favorable CPO fundamental still prevails. In our previous report, The Time is Ripe!, we highlighted that CPO fundamental will remain strong because of 1) pressure on emerging market currencies, such as IDR and MYR, since 8 Nov post the US presidential election, 2) expectation of subdued output till 1Q17 and 3) slower minimum wage hike set by the government at 8.25% for FY17. Note in previous years, this ranges between 13-19% since FY12. According to the latest estimates by MPOB, Malaysia's palm oil production guided a 3.5% MoM decline in the first 20 days of Nov. This follows a 2.2% MoM decline in Oct-16. Given this, and higher Dec demand in anticipation of Chinese New Year, we expect CPO price to trade within the range of MYR2,800-3,000/ton until year-end.

US proposal for higher biofuel quotas in FY17 an added boost for CPO price. On 23 Nov-16, the US Environmental Protection Agency (EPA) has set higher biofuel quotas at 19.28bn gallons or 72.98bn liters (+6.5% YoY) to be blended into gasoline and diesel for FY17, which is higher than the initial 18.8 billion gallons (71.1bn liters) proposed in May. The revised quota also includes 280mn gallons (1.1bn liters) of increase in advanced biofuel quota, which may boost demand for soya oil-based biodiesel by 700-800mn lbs (0.3-0.4mn tons), according to a Bloomberg article. Increased demand for soy-related products will boost soy products' prices, hence positive for CPO price.

India’s high-denomination banknotes ban poses short-term hiccup for palm oil demand. On 8 Nov-16, India announced immediate ban on the use of 500 Rupee (USD7.50) and 1,000 Rupee (USD15.00) banknotes, which account for 86% of total cash in circulation, in an effort to combat corruption and counterfeit money in the country. Citizens will have until 30 Dec-16 to exchange their old notes for the new ones. We think the ban of high-denomination notes will affect India palm oil import negatively in the short-term, given that India is the largest importer of palm oil, accounting for 19% of total Malaysian palm oil export (10M16) and 22% of total Indonesia palm oil export (8M16). Due to slow distribution of the new notes, cash crunch in India will temporarily disrupt retail demand, including purchases of necessities, as well as delayed shipment of vegetable oils to India. As a result, we could see weaker Indian palm oil import translating into Malaysia’s Nov and Dec CPO export figures, before normalizing in Jan-17. According to Intertek Testing Services, Indian palm oil import fell 75% MoM to 58,360 tons in the first 20 days of Nov.

Maintain overweight. Overall, we expect favorable CPO fundamental and better soybean price prospect to negate the negative impact of weaker Indian palm oil import. Moreover, we believe Indian palm oil import should normalize by Jan- 17 once the issues have been settled. Maintain overweight on the plantation sector with LSIP as our preferred pick.

More attendees; Price rebound on volume drop post El Nino: With CPO prices on the rebound, the 12th Indonesian Palm Oil Conference (IPOC) 2016 on 23-25th November 2016 at the Westin Resort Nusa Dua (exhibit 10) with the theme of “Palm Oil Development: Harmonizing Market, Society and the State”, saw around 1,300 delegates, up from the 2015 level of 1,100. Organized by the Indonesian Palm Oil Association (GAPKI), the conference was opened by the chairman of GAPKI, Joko Supriyono, who spoke about the CPO price level which has climbed from its 6-year low at USD630/ton in 2015 to USD660/ton as of October 2016. He pointed out that the price recovery was due to a production drop post El Nino leading to palm oil stocks being at their lowest level of 1.8mn tons in 1H16, down 59% from 4.5mn tons in December 2015. In addition, he stated that Indonesia’s palm oil production in 2016 may only reach 30.9mn tons, -10% y-y. This should drag 2016 exports down by 15% y-y to 22.5mn tons.

5mn cultivating rights certificates to deal with spatial planning: Separately, at the conference, the Minister of Agrarian and Spatial Planning, Sofyan A. Djalil, cited that one of the major problems faced by the palm industry is on agrarian and spatial planning. To address the problem, the minister has issued a policy to accelerate the issue time for cultivating rights certificates (HGUs) to only 90 days. The government will also undertake a pilot project to certify 1,000 plots of smallholders' land, plasma and public land with a total area of 25,000 ha. The government targets to issue 5mn cultivating rights certificates in 2017.

6 government programs to support industry development: At the conference, the Minister of Agriculture, Amran Sulaiman, stated that there are 6 programs defined by the Government in order to further develop the Indonesian palm oil industry and increase its sustainability:
1. Improving the productivity of smallholders’ plantations and increasing funding support for Indonesia Estate Crop Fund for Palm Oil (BPDP) to support smallholders’ replanting, as currently smallholders account for more than 40% of total oil palm plantation areas in Indonesia.
2. Accelerating and encouraging all Indonesian palm oil producers to obtain the Indonesia Sustainable Palm Oil (ISPO) certification for their products in order to be accepted internationally.
3. Increasing utilization of peatlands for oil palm plantations to further intensify palm oil productivity and also to prevent forest fires.
4. Converting the legal status of smallholder plantations from plantation business permits (IUPs) to cultivation rights (HGU) to provide legal certainty and help smallholders obtain bank loans, which should support productivity. The cultivation rights will also enable smallholders to obtain replanting programs from BPDP.
5. Focusing exports on major CPO markets, such as India, China, Pakistan and Bangladesh, but reducing exports to Europe due to the adverse publicity on CPO products from Indonesia.

Lowering TP to IDR2,175 after cuts to our earnings: On the back of a production recovery that started in 3Q16 and given the positive CPO price outlook due to weather disruptions and low global inventory levels, we expect SGRO’s earnings to recover to IDR289bn in 2017F. However, as we cut our 2016-18F earnings by 21-53% (exhibit 12) due to lower production, we lower our 12-month TP to IDR2,175 (from IDR2,500), based on a 2017F PER of 14.2x (from 13x), set at an unchanged 40% discount to Malaysian peers given its small-cap status. Despite reduced upside potential of 10.4% to our new TP, SGRO remains a BUY given its low EV/ha at c. USD6k, below the industry’s average replacement cost of USD9-10k/ha. Risks to our call include lower CPO prices and lower production from its Kalimantan estate.

Gross margin likely to rise to 31% in 2017F on better nucleus yield: We continue to see SGRO’s lower-margin plasma business being surpassed by its nucleus production contribution with a mature area of 66k ha in 3Q16, producing 455k tons of fresh fruit bunches (FFB), for a nucleus FFB yield of 2.4 tons/ha. The nucleus FFB yield is c.26% higher compared to that of plasma which features a low FFB yield of 1.9 tons/ha. Furthermore, we expect SGRO’s nucleus estate to contribute 65% of total FFB production in 2017, compared to 64% in 2016, thereby improving overall gross margin to 30.7% (2016F: 16.7%, 2015: 27.8%). Our expectation of a higher gross margin is also backed by our positive outlook on CPO prices in 2017 which should lead to an ASP rise to IDR7,938/kg from IDR7,260/kg in 2016.

We expect more production stability on Kalimantan’s likely higher contribution: Going forward, we expect SGRO to experience more stable production on a higher production contribution from its 41k ha Kalimantan estate (exhibit 7). As of 3Q16, its Kalimantan nucleus estate FFB production contribution has risen from 124k tons in 2007 to 488k tons, a 19% CAGR. We forecast its Kalimantan estate to produce 121k tons of CPO in 2017, bringing the total production to 359k tons, +25.4% y-y. Higher production contribution from Kalimantan should help SGRO hedge against production swings given Sumatera’s different crop cycle. Moreover, the Kalimantan estate features a higher nucleus proportion of 80%, vs. Sumatera’s 50%.

Strong productive age profile within nucleus estates: SGRO’s oil-palm nucleus estates feature a favorable profile with 71% aged under 15 years, and an average of around 10 years (exhibit 8), while plasma plantation is also in a productive period with 31% of estates under 15 years (average: 17 years). Going forward, SGRO’s oil-palm favorable age profile should also be supported by rising contribution from areas planted with Sriwijaya seeds, which are developed internally. Sriwijaya is projected to generate 5 tons/ha of CPO, about 25% higher compared to standard planting seeds that make up the majority of oil-palm estates in Indonesia. Since 2007, Sriwijaya seeds have been planted by the company in both the Kalimantan and Sumatera estates, bringing the total usage of Sriwijaya seeds to around 50% of total planted area, with an age profile of under 10 years as of 3Q16.

Effects of a shallow FX market; Buying opportunities exist
Based on Bank Indonesia’s data, ytd the average daily turnover for the IDR spot market is only USD1.7bn, which is shallow by regional standards, reflecting just 0.5x of GDP (exhibit 1), one of the lowest among its regional peers. Even worse is the 1M NDF market, which only trades at USD0.7bn a day ytd. Unfortunately, the NDF sometimes can influence the spot market, particularly on pressure stemming from the recent Trump election. However, given such illiquidity, we advise investors to remain calm, particularly as we believe the fundamentals in Indonesia remain largely unchanged. We note that, through years of balance sheet repair since the 1998 Financial Crisis, the Indonesian stock market’s net gearing has improved from more than 150% back then to 27.3% in 9M16. Furthermore, we believe Indonesia is currently in a good position given that its 3Q16 CAD of 1.86% is the lowest since 1Q12. In fact, we think the current situation presents buying opportunities for investors as we expect the IDR to become stronger by year-end. It is worth pointing out that there should still be around USD10bn to come in from tax amnesty repatriation between now and the end of 2016.

Sensitivity analysis: 1% weaker IDR = 0.9% market EPS
Given recent IDR gyrations, we present our latest currency sensitivity analysis on the IDR/1USD, in an effort to aid investors in better gauging their investments in Indonesia. Our study, based on 87 non-financial stocks under our coverage (62% of total JCI market capitalization), shows that each 1% IDR depreciation could lower the EPS of our covered stocks by 0.9% overall (exhibit 5). That said, it is not a surprise that a recent 3% negative swing in the NDF market spooked investors, as it could translate into a 3.6% wipeout in 2017 market EPS growth.
Winners: Coal, Metals, Oil & Gas and Plantations
A stronger dollar should in general spell good news for sectors with dollar revenue such as Coal, Metals and Oil & Gas and Plantations (exhibit 5). By stock, our sensitivity analysis indicates that $SIMP, $WINS, $TBLA, $PTBA and $SGRO should be the major beneficiaries of IDR deprecation within our basket of stocks (exhibit 2).

Losers: Poultry, Property and Consumer Discretionary
Against a backdrop of a weaker IDR, sectors with large USD costs and borrowings should suffer: Poultry, Property and Consumer Discretionary (exhibit 5). Stock-wise, losers of a stronger dollar include heavily leveraged companies under our coverage: $SMCB, $LPKR and $MAPI (exhibit 3).
Safe havens: Mainly Construction and Telcos
For investors seeking shelter from currency volatility, we point to the Construction and Telco sectors (exhibit 10 & 24). In terms of stocks, $JSMR, $SCMA, $SIDO and $WSKT (exhibit 4) should have their earnings relatively least altered by FX swings.

Malaysia’s CPO production unexpectedly fell MoM in October, which combined with a small reduction in exports, resulted in a minimal rise in inventory. This indicates that production should taper off from hereon, having peaked in September, providing a short-term bullish signal for CPO prices. We now expect prices to remain strong until 1Q17, when signs of a production recovery take place. No change to our NEUTRAL sector call, with Top Picks KLK, Sime Darby, Golden Agri and London Sumatra.
¨ Malaysia’s CPO production fell 2.2% MoM in October, while YTD production decline widened to 15.6% YoY. This was an unexpected decline, which could indicate that the peak production period is over in Malaysia, having peaked in September. We understand that production in Indonesia could still be on the rise in Oct/Nov, as El Nino hit Malaysia first before affecting Indonesia.

¨ Exports fell in October (-1.4% MoM), as China continued to utilise its rapeseed oil and soybean stocks. Exports to China saw a MoM decline of 5.2% in October, while exports to India and the US fell by22.2% and 10.1% respectively.

¨ Malaysia’s YTD-Sep exports dropped 7.3% YoY, with wider declinestoChina (-29%), India (-15.4%), US (-13%) and the EU (-12%). We expect demand from India to improve in the coming months,due to the change in import taxes, while China should see some festive demand prior to Chinese New Year.

¨ Inventory rose 1.8% MoM to 1.57m tonnes in Octoberdue to lower exports, bringing the stock/usage ratio to 8.4% (Sep: 8.3%), below the 12-year average of 10%. With a likely slowdown in production and higher exports, inventory should remain rangebound over the next few months, ranging 1.5-1.8m tonnes.

¨ Recent developments:

i. South American soybean planting partially delayed due towet weather in Argentina and Brazil.Planting is at 6-8% of the intended area currently, vs the 12-16% average. If this continues, it would help reduce high soybean stocks caused by four years of bumper crops in the US;

ii. China’spalm oil imports remain weak, down 38.4% YoY in YTD-Sep, due to high stockpiles–6.2m tonnes of soybean, 3.5m tonnes of rapeseed oil. We understand China plans to release 0.1m tonnes of rapeseed oil into the market per month, which would continue to dampen demand.

iii. India’spalm oil imports fell 10.3% YoY in YTD-Sep. However, this should improve due to the recent cut in import taxes favouring palm oil. We expect palm oil’s market share to rise from the current 56%, while there should also be some switching back to buying crude vs refined oils.

¨ Still NEUTRAL. Given the unexpected reversal of output in October, we now believe Malaysian output is likely to disappoint for the rest of 2016 and 1Q17, as it plateaus off from the seasonal peak. This would result in CPO prices remaining at stable levels of MYR2,600-2,900/tonne for the next few months. After 1Q17 however, production is expected to recover more significantly, thereby lowering CPO prices. We keep our MYR2,500/tonne CPO price assumption for 2016-2017. Our regional Top Picks remain Kuala Lumpur Kepong, Golden Agri and London Sumatra.We also like Sime Darby as a restructuring play. (Hoe Lee Leng, Hariyanto Wijaya, CFA, CFP, CA, CPA)

- +9% gains in MSCI Indonesia since our country upgrade in July - Since our upgrade of Indonesian equities to overweight two months ago in the MIG publication after clarity on its tax amnesty programme emerged, sentiment has further improved following the appointment of well respected Finance Minister Sri Mulyani Indrawati. The Indonesian equity market has seen strong equity inflows in 3Q16 lifting the index up ~9% (local currency terms, +8.2% in USD), which has outpaced world equities’ gains (+5.2%) for the same period and supported our call.

- Year to date’s gains of +18.6% has also more than recouped 2015’s losses of -12%, which has supported the turnaround highlighted in our January 2016’s South East Asia Equity Strategy report. The equity market rally year to date has been supported by a benign environment of lower interest rates, stable IDR currency vs the USD, under-owned positions in global portfolios and improving confidence in Indonesia’s recovery story. Estimated equity inflows into Indonesia so far for 3Q has exceeded the total inflows for 1H16, driving the market to new highs. Since mid May this year, it is estimated that net equity inflows reached $1.7bln, vs $1.6bln net outflows over the whole of 2015 (source: JPM estimates).

- Near term positives post amnesty and cabinet reshuffle look priced in, valuations are now close to 10 year high – At 16x PER, Indonesian equities is now trading close to +2 standard deviations to its 10 year historical average multiple and at its highest valuation level since 2007, which we believe has priced in much of the near term positives. Although near term liquidity is likely to remain supportive given benign expectations on interest rates, we caution that valuations have caught up and believe it is prudent to start taking some money off the table. On domestic updates, while the recently released 2017 budget is credible, it is unlikely to lead to further corporate earnings upgrades given a moderate government spending target of 6% (planned fiscal deficit for 2017 is 2.4% of GDP, flat/lower than 2016E). Towards the end of September and December which marks the first and second phases of the tax amnesty programme’s staggered tax rates for declared wealth, investor sentiment may also be influenced by expectations over the tax collections.

- Muted start to the 9-month tax amnesty programme, although still early days - As of 23rd August 2016, the asset declaration in the Tax Amnesty Program has reached Rp51.7tn, consisting of 85% onshore/15% offshore assets (12% overseas assets declared, 3% overseas net assets repatriated), while asset repatriation has reached Rp1.6 tn. Momentum of onshore assets declared in first half of August has picked up, with the tax office reporting about Rp11.5tn worth of onshore assets declared (>4x July’s). About three-quarters of the assets declared were from private individuals, and the balance private entities, which we view as supportive of property sector’s recovery given interest rates are expected to remain low while the Ministry of Finance has allowed repatriated funds to be invested in real assets (such as property and gold).

- Looking ahead, earnings upgrades need to pick up momentum for the rally to have more legs - Earnings wise, the recent 2Q results season was mixed with single digit corporate top line growth from a year ago. Concerns on banks remain dragged by asset quality issues while commodity related earnings have been moderate. Following the latest 2Q earnings season (where consensus earnings were trimmed -2% lower for FY16E and FY17E), FY16E and FY17E earnings are now forecast to grow +7% and +14% respectively (higher than Asia ex Japan equities’ 2.2% FY16E and 11% for FY17E respectively) which we believe is priced in current valuations.

Time to lock in some profits – Switch out of names which have rallied and offer no upside to target prices- Sectors we are cautious on are: Commodity related plays which have rallied and priced in recovery expectations (coal – Bukit Asam, ITMG, palm oil – Astra Agro, London Sumatra), Banks (loans growth will be moderate while we expect asset quality concerns to remain a near term overhang) and Utilities (in particular, Perusahaan Gas – where we think profitability will remain pressured by regulatory efforts to lower gas prices).

Preferred Picks/Switch Ideas

- Preferred Sectors we would accumulate new positions are: Property (Bumi Serpong – Western Jakarta play, large landbank catering to middle income buyers), Telecommunications (Telekomunikasi Indonesia – improving smartphone penetration and data usage supported by a young population), Consumer (Indofood and Media Nusantara, which benefit from an improving domestic economy in 2H16) and Infrastructure (Jasa Marga – No. 1 toll road operator, long term beneficiary of infrastructure development in Indonesia).

- Risks to the current rally include weaker than expected global economy, faster than expected Federal Reserve interest rate hikes which may result in global liquidity volatility and disappointments in the domestic recovery and infrastructure spending pace (continues to be a focus in the 2017 budget, with 9% yoy expected growth).

· Long-term structural decline in supply: less new planting, cut-backs in fertilizing etc due to strained cashflow past few years, moratorium on new land. All should support higher CPO px long-term.

· Near-term catalysts in-check: biodiesel positive development, CPO inventory days should start to decline and reach as low as 40 days in 3Q16 (insufficient) on the back of el-nino effect (recall takes 9 months for elnino to impact production yield).

· New emerging catalysts: extreme weather anomalies in brazil and argentina. This should boost soybean px, and hence CPO px. All of this should help CPO px break above MYR3000 this year. Our earnings today assume 3000 – hence likely to see some upside risk.

· Top-picks: SGRO and AALI. On the latter, even if we assume right issue (15% earnings dilution) still see c.20% upside potential. Risk on AALI is potential MSCI deletion. But in reality if CPO px move up, all cpo stocks will move higher – so even LSIP is still appealing at this price.

- Slight increase in 2016 FFB production assumption on rising mature areas causing...: For 2016's harvested production of palm fresh fruit bunches (FFB), we expect 2% y-y growth to 1.88mn tons, before rising to 1.97mn tons in 2017, mainly supported by increased mature areas. However, we expect its 2016 FFB yield to fall to 15.4 tons/ ha, down 7.2% y-y, due to continued unfavorable El Nino impact. Note that in 2015, FFB reached 1.85mn tons, up 22% y-y, on higher mature areas in Kalimantan and Sumatra. This note marks a transfer of analyst coverage.

- ... modestly higher 2016 volumes: In 2016, we expect sales volumes to reach around 364k tons, up 3% y-y, held back El Nino related production disruption, although we assume 10% higher y-y 2016 ASP of IDR7,700/kg, which should help overall sales. Last year, SGRO experienced increased 2015 CPO production to 388k tons, up 21% y-y, with higher sales volumes of 353k tons, up 8.4% y-y. On its 2015 CPO revenue of IDR2.5tn, which was down 9% y-y, the culprit was a 16% y-y drop in ASP to IDR7,030/kg.

- Mandatory biodiesel mix (B20) program to provide some tailwinds: The 2016 government program for a mandatory 20% (up 5pp from 2015) biodiesel mix for diesel fuel should provide a cushion on the demand side of the equation by improving demand domestically. On the supply side, production growth should still be limited given the after-effects from last year’s harsh weather conditions.

Outlook: Capped by limited growth in 2016 production For this year, we now expect a lower production yield, resulting in slight 1.4% y-y production growth to 393k tons, as we expect the impact of El Nino to affect global commodity production, including palm oil. Despite increases in mature areas in Kalimantan and Sumatra, we expect El Nino to hamper 2016 production growth to only 1.4% y-y. Therefore, we only slightly raise our 2016 revenue forecast by around 3% (Exhibit 5) despite increased average IDR/USD exchange rate assumption from IDR13,455/1USD in 2015 to IDR13,800/USD in 2016. On earnings, we now expect SGRO to book 2016 net profit of IDR280bn, up 13% y-y, helped by our expectation of higher CPO prices, which should result in improved slight margin recoveries across the board.

Recommendation: Retain HOLD but raise TP to IDR1,980 on higher peer valuation Helped by positive sentiment on higher oil and CPO prices, SGRO's share price has experienced 12% ytd market outperformance (exhibit 4), rallying more than 90% from its bottom at IDR1,010 just 6 months ago. With the sector having performed well, we raise SGRO's 12M TP to IDR1,980 (from IDR1,800), based on a 2016F PE of 13.4x (previously 2016F PE of 12.4x), still at some 50% discount to its Malaysian peers (exhibit 7), warranted due to its illiquid status. Given 1.3% downside to our new TP, SGRO is a HOLD at best. Risks to our call are lower- or higher-than-expected CPO prices and production.

Malaysia’s inventory level has dropped below the all-important 2m tonne psychological mark to 1.89m tonnes. We expect it to hover around these levels for the next few months, as CPO production may remain flattish until end-2Q16/early-3Q16. We also expect strong CPO prices to persist until the start of the run-up of the next seasonal peak. Maintain OVERWEIGHT. First Resources, Genting Plantations and London Sumatra are our Top Picks for Singapore, Malaysia and Indonesia respectively.

¨ Malaysia’s CPO production rose 16.9% MoM in March, coming from a short month in February and an improvement in rainfall. YoY production was still down 18.4% in March, while YTD production declined 10.2%. We expect FFB output to remain flattish over the next few months, before starting the run-up to the next seasonal peak at end-2Q16/beginning-3Q16.

¨ Better exports in March. Given the shortened February (a festive month), March’s exports recovered 22.9% MoM and brought YTD (Mar 2016) exports to an increase of 10.5% YoY. This was due to higher exports to India (+10% YoY) and the EU (+23% YoY), offset by lower exports to China (-27% YoY).

¨ Inventory fell below 2m tonnes, dropping by a steep 13.1% MoM to 1.8m tonnes. We highlight that stock/usage ratios are now at 10.9% (down from 13.2% in February) and close to the 12-year average of 10%. We expect inventory levels to hover around these levels for the next few months.

¨ Recent developments:i. US Department of Agriculture’s (USDA) planting intentions survey results show that soybean planting to decline 0.5% to 82.24m acres in 2016, while corn planting is set to rise 6.4% YoY to 93.6m acres;

iii. India saw strong 21.8% YoY growth in edible oil imports in YTD Feb 2016, with palm oil imports up 11%. We expect this growth rate to be maintained, as India expects to import 10-15% more edible oil in 2016;

iv. Malaysia’s reinstated export tax levy of 5% for April (for CPO price above MYR2,400/tonne) should see downstream players record better margins as this translates to a USD30-35/tonne discount for CPO feedstock. Although it is still smaller than Indonesia’s USD50/tonne discount, it does make Malaysian refiners slightly more competitive.

¨ Still OVERWEIGHT. We expect more upside for plantation stocks, as most still only reflect CPO prices of MYR2,300-2,500/tonne. YTD, Malaysian CPO production is down 10% but CPO prices have risen 22%. Our Top Pick for the region remains First Resources, while Genting Plantations and London Sumatra Indonesia are top choices for Malaysia and Indonesia respectively.